Gatekeeper of company risk
Accuracy is key when assessing credit risk. Wei Yen of Lehman Brothers tells Raymond Ma how he does it
Debt ratings are used by everybody from corporates in fancy boardroom-level mergers and acquisitions to investors and, more often, by regulators. To meet this growing demand, ratings agencies such as Standard & Poor's, Moody's Investors Service and Fitch Ratings churn them out on a daily basis. But what do they reflect and how are they arrived at?
Wei Yen, managing director and head of ratings advisory, Asia corporate finance group, for Lehman Brothers Asia - who works with global ratings agencies to get the best possible rating for clients - answers some of these questions.
What is ratings advisory? Rating is an established way of quantifying credit risks. With the proliferation of financial products, the analysis of risk gets more complicated. In general, we consider credit risk that reflects an issuer's operational and financial factors. We also examine political and reputation risks that may come with a particular transaction. My role as ratings advisory is to assist our clients in achieving optimum ratings from the global rating agencies, allowing them to access the capital markets to support their business strategy. I also wear another shoe at Lehman Brothers. I sit on the firm's Asia commitment committee, which is responsible for approving transactions originating from Asia. This role combining internal and external credit work is rare among investment banks.
What instruments does Lehman rate? Lehman Brothers is a leading global player in debt capital markets, taking part in public and private loan markets. If a public rating is needed, Lehman Brothers will help the issuer work with ratings agencies such as Moody's, S&P and Fitch to obtain one. In the public market, rating helps broaden the investor base and achieve more favourable pricing for a transaction. In the latter, rating is important because it helps the deal team and the client visualise the impact of a balance sheet exercise. It will also allow us to appropriately price the transaction.
How do you decide on a rating? We do a lot of estimated ratings for potential transactions internally. We generally follow rating agencies' published methodologies and there are plenty of them nowadays. I used to work for a rating agency so am familiar with the analytical thought process and key considerations. When we finish the internal credit work and if the transaction is a public bond, we approach the global agencies such as Moody's, S&P and Fitch and assist the client in getting the transaction rated.
How should the rating be interpreted? Rating can be seen as an estimate of expected loss. The higher up the rating scale, the lower the expected loss, and vice versa. Rating agencies publish historical default and loss data and a rated instrument's expected loss can be benchmarked against published data. Investors often trade debt securities based on their credit outlook and the portfolio's asset allocation criteria.
What are some of the main tasks involved? I am involved in the entire chain of events of a transaction, from pitching to due diligence, credit work, internal approval, rating agency liaison and presentation. The job is never boring.
What are the main sources of information? We rely on publicly available information and that from the company management for transactions. If Lehman Brothers underwrites a transaction it is the firm's responsibility to examine all material and information and make proper disclosures to potential investors.
Who uses the rating and for what purposes? Public ratings are used by investors for trading, issuers for accessing the debt capital market and intermediaries for facilitating transactions. Regulators are increasingly using ratings. The advent of BaselII has formalised the use of ratings in assessing credit risk and capital charge in a commercial bank's loan portfolio. As the financial markets become more globalised with new products developed almost daily, rating becomes more a common language in the understanding and management of risk.
What skills are necessary to succeed in your line of work? I have benefited from a variety of experiences which have broadened my perspectives. But I think the basic requirements are a good understanding of financial and credit analysis, an appreciation of the various factors that affect the performance of a company, including the macro-economy, the banking system and the capital markets, and individual business sectors. Besides analytical skills, you should be able to think outside of the box and have an innate sense of curiosity.
What is the best thing about your job? The wide geographic and industry exposure, and the ability to interact with industry leaders and work with my capable colleagues are the main attractions. That Lehman Brothers has a credit-driven culture that thrives on teamwork makes the job that much more pleasant.
An example of debt ratings
AAA Highest credit quality
AA Superior credit quality
A Satisfactory credit quality
BBB Adequate credit quality
BB Speculative
B Highly speculative
CCC Very highly speculative
CC Extremely speculative
C Speculative
D In default of principal, interest, or both